Good afternoon. My name is Joanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tallgrass Energy 2015 Quarterly Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Mr. Lien, you may begin your conference.

Nate Lien

Thank you, Joanne. Good afternoon, everyone. We appreciate you joining us as we discuss, among other things, the Tallgrass Energy Partners and Tallgrass Energy GP results from the fourth quarter of 2015, which were released through our joint press release and respective 10-Ks this afternoon.

Joining me on the call are David Dehaemers, Tallgrass’ President and Chief Executive Officer; and Gary Brauchle, Tallgrass’ Executive Vice President and Chief Financial Officer.

Before turning the call over to David, let me remind you that this event is being recorded and a replay will be available for a limited time on our website. Additionally, our comments today will include forward-looking statements and estimates. These forward-looking comments are subject to various risks and uncertainties, and reflect management’s views as of February 17, 2016.

Please refer to our filings with the SEC which are available on our website, including our 10-Ks, which provide discussions of factors that may cause actual results to differ from management’s projections, forecast, estimates and expectations. Please note that except to the extent required by law, Tallgrass undertakes no obligation to update any forward-looking statement.

With that, let me now turn the call over to David for his opening remarks.

David Dehaemers

Good afternoon, everybody, and thanks for joining our Tallgrass Energy fourth quarter earnings call. Just a couple of housekeeping things to get out of the way. Bill Moler isn’t on the call with us today. You won’t see any mysterious 8-Ks being filed by us, sort of anything like that, he just had a long plan holiday for a special occasion in his life. So Gary, I and Nate are what you’ve got for now. Also, we will kind of the top of the hour 5:00 PM Eastern, I think we’ll endeavor to be done by 6:00 PM eastern, so that those of you who rely on Jim Cramer and his lightning around for your MLP advice can make sure to watch him tonight.

Having said all that, I know, you’re – many of you’re anxious to hear about the capital markets – that our capital markets needs how much of oil is flowing on Pony in our 2016 guidance. And while those things are important, it’s appropriate to first focus on another quarter of outstanding results at TEP and TEGP.

Fourth quarter produced solid, financial and operational results for TEP, but the crude transportation – crude oil transportation logistic segment otherwise known Pony Express again leading the way. Even in the face of the current commodity environment, Pony Express continues to exceed our projections and expectations. Its results as well as solid stable performance in the natural gas transportation logistic segment led to our 10th consecutive quarterly distribution increase since TEP’s IPO in May 2013.

Some have wondered why we increased our distribution in such a meaningful way when the market may not be “paying for growth". Reasons are straightforward. It sends the message that we’re confident in our business and our customers. But perhaps more importantly is that, we told our unitholders what we would do and we’ve managed the business to remain in a position of strength and stability that enables to do just that do what we certainly we’re going to do.

Besides the market paying for growth is not a one-day, one month, or one quarter proposition. It’s a long-term proposition, and time will truly tell the story of whether or not we do, in fact, get pay for it. We continue to have stable cash flow leverage below or within our long-term targeted range of solid balance sheet and ample liquidity. And therefore we will prudently distribute our available cash and cash flow from operations to our unitholders as we go forward.

Moving onto the fourth quarter results, Pony Express generated distributable cash flow to TEP of $49.8 million for its 66% and two-thirds interest, or an increase of $6.1 million over the $43.7 million it received for the third quarter of 2015. We would caution you again simply annualizing this number for a couple of different reasons that Gary will highlight in a little more detail in a bit. But it certainly illustrates the outstanding results Pony Express continues to produce.

The fourth quarter adjusted EBITDA for TEP was $64.7 million. And this amount does not include any of our fully collected deficiency payments under our take-or-pay contracts on Pony Express. If you include the quarters deficiency payments and adjusted EBITDA, the amount would have been $69.2 million. We’ve included a table on our press release to show the impact of deficiency payments, if we were to have included them in adjusted EBITDA. We can briefly talk about this more later, some have a hard time understanding why from a technical accounting standpoint that is the case.

Bottom line is we added the table to the quarter to ensure an apples-to-apples comparison for those who do not take efficiencies – deficiencies into account in their models, on DCF basis, it makes no difference.

Our DCF for the fourth quarter, which includes deficiency take-or- pay cash payments, again, all of which have been collected was $62.6 million and beat our own internal expectations. Coverage for the quarter was 1.06 times, if you include the $5.6 million in distributions that were paid in association with the $6.5 million units of TEP issued after the fourth quarter for the third Pony Express dropped to the seller TDEV or Tallgrass Development.

If you were to exclude the distribution associated with those units, our coverage for the quarter would have been and even stronger 1.17 times even with the substantial Q4 distribution increase. TEP’s coverage for the full-year 2015 was 1.14 times and 1.18 times calculated with and without the $5.6 million distributed on the $6.5 million units issued at this TDEV seller in January before the record date.

Cash in excess of distributions or dollar coverage was approximately $28 million for 2015. So much focus on coverage recently, I think, it’s important to remind everybody that our cumulative cash coverage since our IPO in May 2013 is over $46 million. I do have the break-out for anybody that who wants to know that later, but the cumulative amount through the end of year since IPO was $46 million.

This continues to illustrate how we have grown our business and our distributions in a way that balances best-in-class growth along with prudent healthy distribution coverage. We believe our ability to do that sets us apart from many other MLPs and provides us with financial flexibility even in volatile capital markets environments.

Our strong quarterly performance supported TEP in increasing its quarterly distribution by $0.04 per quarter to $0.64, or $2.56 annualized. This represents an increase of 6.7% from the third quarter of 2015, 32% year-over-year growth, and approximately 123% growth from the annualized minimum quarterly distributions of $1.15 at or May 2013, IPO date.

Also, we want to remind everyone with the January Pony drop, we announced our intention to increase our quarterly distribution by, at least, $0.06 sequentially for the first quarter of 2016 that will be payable on or around May 15, 2016.

As a result of the $0.64 distribution at TEP, TEGP received distribution from Tallgrass equity of approximately $8.3 million, or an increase of $1.4 million from the third quarter of 2015. Based on that amount, TEGP declared a distribution to Class A shareholders of $0.173, or $0.692 on an annualized basis, which represents an increase of 20.1% from the third quarter and 30.2% since the TEGP IPO in May 2016 that seven months for those of you that are challenged with calendars like I am.

One final thought before I turn it over to Gary. As we look back on the financial guidance we provided for 2015, the same time last year, we handily beat the figures we put forth were adjusted EBITDA, DCF coverage, and perhaps most importantly the distribution growth guidance of 20%, which came in at 32%. As we said before, we believe all MLPs midstream companies are not created equal and this serves as a powerful case endpoint.

I’ll now turn the call back over to Gary to provide additional financial details and then I’ll be back to talk about some developments on each of our assets.

Gary Brauchle

Good afternoon, everyone. Let’s jump right into the segments and then I’ll spend a bit of time on our balance sheet, customer credit metrics, and our 2016 guidance.

In the Crude Oil Transportation and Logistics segment, which is Pony Express, I should take a minute to explain two concepts within our shippers’ take-or-pay contracts. First, if the shipper does not transport its take-or-pay volumes in a given month, they pass the contractual take-or-pay dollar amount. Any of that amount that is attributable to volumes not actually transported is considered by the accounting rules to be unearned or deferred revenue and it’s not included in net income or adjusted EBITDA. It is, however, operating cash paid to Tallgrass and therefore is distributable cash flow. As such, we included as a positive adjustment after adjusted EBITDA to arrive in DCF.

Second is the concept of incremental shipments whereby a shipper elects to transport more than their take-or-pay volumes. When we accommodate this and ship excess barrels for them, those amounts are earned recorded as revenue and therefore included in first, net income; next, adjusted EBITDA; and finally, DCF without any necessary adjustments.

Each of these amounts is tracked on a shipper by shipper basis at Pony Express. So I took the time and tested your patience to tell you this, because we, in fact, experienced both deficiency payments and incremental shipments in Q4 with different shippers and understanding how they impact our financial results is important.

So now on the Pony’s Q4 performance. The simplest way to describe that is look at TEP’s two-thirds interest in Pony’s distributable cash flow, which is the cash that TEP received for the quarter. TEP received DCF from Pony at $49.8 million for its two-thirds interest for the fourth quarter of 2015, and that represents an increase of $6.1 million as compared to the previous quarter Q3 of 2015. That increase at DCF is primarily attributable to incremental barrel shipments experienced during Q4. And since they are difficult to predict and may not recur, we would caution you against annual – annualizing Pony’s Q4 performance as the model or expectation going forward.

For the purpose of forecasting, I would refer you back to the press release on January 4, that announced the third drop of Pony to TEP and the economics detail therein on which we transacted, which rightfully should be a reasonable proxy for long-term performance of the pipeline. And while we’re talking about expectations for Pony going forward, since we have seen deficiency payments for a few quarters now, it’s probably appropriate to estimate that between 5% and 10% of Pony’s DCF will come in the form of deficiency payments for 2016. We may not experience them throughout 2016, but for now, modeling it that way makes sense.

Now on the Pony’s volumes. Average daily throughput on PXP during Q4 was approximately 288,000 barrels a day, up from Q3’s average of 253,000 barrels a day. January numbers show that throughput was approximately 285,000 barrels a day and February nominations would predict that we’ll move about 300,000 barrels a day for the month, again in February. These are short-term data points in the big picture of five-year contracts, but they are a positive indication of the pipeline’s utilization.

Turning now to the Natural Gas segment, which includes TIGT and Trailblazer. It produced adjusted EBITDA of $15.5 million, down slightly as compared to Q3 of 2015, but comparable to Q4 of 2014. The slight decrease from Q3 of 2015 is primarily related to higher operating costs, which fluctuate from quarter to quarter.

Firm contracted capacity for Q4 of 1.46 billion cubic feet a day was down slightly when looking at the sequential and prior quarters. But overall, the gas pipelines continue to be stable assets and continue to perform in line with our expectations. As a reminder, TIGT filed a rate case in Q4, and while we continue to have conversations with our shipper group on that very matter, the new rates will go into effect on May 1.

The Processing and Logistics segment generated adjusted EBITDA of $3.9 million for the fourth quarter of 2015, representing an increase of 900,000 as compared to the third quarter of 2015, and a decrease of 5.5 million as compared with the fourth quarter of 2014. The increase over the third quarter was primarily due to higher costs associated with planned downtime for annual maintenance at the facilities during the third quarter of 2015, and the decrease from – for the fourth quarter of 2014 or against the fourth quarter of 2014 is primarily due to lower average inlet volumes.

Approximate average inlet volumes at the facilities were 104 million cubic feet a day for Q4 of 2015, as compared to 168 million cubic feet a day for Q4 of 2014, and a 110 million cubic feet a day for Q3 of 2015. As we have previously mentioned, we fully expected these volume declines and as we look forward, we may see additional decreases in inlet volumes during 2016.

Now, turning to the balance sheet. At the end of the year, we had $753 million drawn on our $1.1 billion revolver with $57 million increase from the prior quarter’s balance of $696 million was due to our purchase of the Redtail Water Assets that we announced in December.

In November, we increased our revolver from 850 or $850 million to $1.1 billion, and in January, again, increased the facility $1.5 billion in connection with the third Pony drop. At the end of January, we had about $1.2 billion drawn on our revolver. As it relates to leverage, our leverage at the end of 2015 was better than our long-term guidance of three to four times at approximately 2.9 turns based on Q4 annualized EBITDA or 2.9 debt to EBITDA.

If you were to take our debt balance of $1.2 billion at the end of January and have the incremental cash flow attributable to the third Pony drop of just more than $82 million reported in the drop press release on January 4, and you add that to the annualized Q4 EBITDA figure, our leverage ratio would be right at 3.5 times debt to EBITDA on our pro forma basis for the third Pony drop.

By simply assuming our adjusted EBITDA would stay constant for 2016, we would have the full capacity of the $1.5 billion revolver available to us based on our 4.75 times leverage covenant. And given that our known capital expenditure needs on a growth basis are projected to be less than 25 million for 2016. You can see that we have more than sufficient liquidity available to us at TEP.

Before I provide our 2016 guidance, I would like to spend a few minutes on our counterparty credit metrics, as it has been an area of focus within our industry recently. Since Tallgrass purchased these assets in November of 2012, customer credit has been an area that has received a lot of attention for our team. As you will see in TEP’s 10K and soon to be issued Annual Report as of 12/31/15, approximately 63% of our revenue was derived from investment-grade counterparties.

As of today, those counterparties are still investment-grade rated by, at least, one of the agencies. In addition, we do have an internal model here at Tallgrass that mirrors the rating agency scoring models, which we use to measure and monitor credit risk of our customers. For those counterparties that are unrated, our model would indicate that another 7% of those revenues are from parties that have investment-grade credit metrics bringing that total to about 70%.

Further, if you were to combine customers that are rated or have characteristics based on our model of BB+ to BB-, that metric would grow and show approximately 85% to 95%, I’m sorry, 85% to 90% of our revenues are of BB- or better credit quality.

Next, let’s talk quickly about collateral. We do have an excess of $200 million and what we consider at Tallgrass hard collateral to potentially use in cases of default. That collateral does not include parental guarantees from our customers or the parent companies of our customers of which we have a much higher amount than $200 million. One last credit statistic for you as we look ahead to 2016, if you were to annualize our Q4 revenue as a rough proxy for 2016 revenues, less than 20% of our estimated 2016 revenue is from non-investment grade type customers, or is not collateralized.

Finally and perhaps most importantly, as it relates to our accounts receivable, our December billings or revenue are over 99% collected, including our take-or-pay deficiency payments, and January billings are not yet due.

So let’s move on into an overview we expect for TEP in 2016. As we’ve done in the last two years, we’ll provide guidance one time and will likely not updated throughout the year. It’s important to note that the following figures include our recent acquisition of Pony Express, but do not include any additional drop downs or acquisitions in 2016.

As it relates to a long-term debt issuance, we remain ready and able, but unwilling at current market conditions. We have budgeted an issuance later in the year, but as we have said and continue to believe, we’ll only do it in reasonable market conditions, which we have not seen for sometime now.

For 2016, we expect distributable cash flow at TEP between $285 million and $305 million, and distribution coverage at TEP between 105 and 115, or 105% to 115% of distributions. I think it’s important to note that, we expect to derive in excess of 95% of our cash flow from firm fee-based payments, and we do not anticipate a need to access the debt or equity capital markets based on our currently known capital expenditures.

Now, I’ll hand it back to Dave for some commercial updates.

David Dehaemers

Thanks, Gary, good job. As we do each quarter, I’ll now provide a brief update on Pony Express, an update on the TIGT rate case and the Tallgrass assets that are not owned by TEP, at present.

First up is Pony. The installation of the 15 DRA skids which we’ve talked about in the past, which increased the capacity of pipeline by, at least, an additional 100,000 barrels per day is now complete. We continue to experience positive operational benefits due to those capabilities.

In addition to the increased throughput capacity, DRA also allows us to decrease the run time for pump stations providing savings on electrical costs and ultimately the maintenance of our pump stations. Cost savings we have experienced to-date have more than offset the cost of the DRA. Long-term potential revenue enhancements from this project are outstanding.

Earlier Gary provided the strong throughput estimates for January and February. And I’d also note that the average throughput for the month of December was in excess of 325,000 barrels. It’s clear that the pipeline has ample capacity to ship in excess of its nameplate capacity.

With regard to the TIGT rate case, as we reported in the Q3 call and Gary mentioned earlier, TIGT filed a rate case with the FERC in late October. The filing proposed changes to TIGT’s rate structure, updates to its tariff, and the implementation of a system wide rate increase for its firm and uninterruptible transportation storage services.

The FERC accepted our filing and the rates are scheduled to go into effect on 5/1/16. We continue to respond to numerous data requests from our customers or continuing discussions with our shippers and with the FERC on the matter, we continue to move towards an implementation date of May 1, on those rates, and that’s the point at which we will be receiving them subject to refund.

With regard to REX. As a reminder, Tallgrass Development holds our 50% ownership in REX and operates the pipeline Tallgrass Development as a private company. As we mentioned on the prior two calls, REX’s Zone 3 east-to-west project went into service on August 1 last year. All interconnects and point expansions are now operational. And we’ve recently been running at full capacity on the $1.8 billion – 1.8 billion cubic feet per day within Zone 3.

It’s also interesting to note the pipeline recently moved approximately 3.1 billion cubic feet of gas on one day. When you consider deliveries from the east and west, I have to inject a little bit here, and it goes something like this. I wonder who would have thought that three years ago headlines like “dingdong, Rex is dead” would be out there when today it’s moving 3.1 – it’s moved 3.1 Bcf a day. I guess, the point here is, I assure you Rex is alive and well.

We continue to be focused on the third phase of transformation at Rex, which is the 800 million cubic feet a day of Zone 3 capacity enhancement project. The project is ongoing. We continue to wait for our 7(c) certificate from the FERC, which we hope to receive any day now frankly, or in the near future. We continue to expect in service late 2016. And once this occurs, Rex will be capable of moving 2.6 billion cubic feet a day from east-to-west in Zone 3, that’s a total capacity of a minimum of 4.4, if you took into account everything, and it could be even higher than that depending on which way gas flows.

Of this total capacity of 2.6 in Zone 3, 2.56 billion cubic feet a day, I guess, that’s roughly 99%, is current 98%, is currently sold firm for weighted average life of about 17 years. In summary, developments at Rex continue to be positive both commercially and financially.

Tallgrass Terminals. As we mentioned last quarter, we continue to make good progress on the Buckingham truck unloading terminal, construction is underway and in service currently expected in Q3 of 2016. We also continue to work on other projects we have mentioned on previous calls. Though the current commodity environment add some challenges to getting new projects off the ground, our terminals team continues to work hard to move these projects forward: We hope to be able to share more details on these and other opportunities within the coming months. We continue to be very positive about terminals and opportunities it presents for organic and future growth.

In closing, as we look back on the fourth quarter and 2014 as a whole, we’re very proud of the performance of our partnerships, performance that exceeded both our guidance and the expectations of the market. At Tallgrass, we don’t obsess over short-term market movements. We focus on things we can control like managing our business for long-term success.

We remain calm and confident managers of our companies and firmly believe that going forward, Tallgrass has the right assets, the right contracts, the right counterparties, the right balance sheet, and ample liquidity to move our company forward and continue to deliver excellent results to our equity owners.

Once again I’ll tell you that our work is not complete, so it’s just – it’s only just begun. As always, thank you to all of our partners and shareholders for their confidence investing in TEP and TEGP. And thank you to everyone on this call for your interest in our companies.

With that, we’ll turn it over to the operator for a Q&A session. Joanne?

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from the line of Brandon Blossman from Tudor.

David Dehaemers

Hey, Brandon, how are you?

Brandon Blossman

Hey, guys, afternoon. I guess, let’s start, kick it off with high level strategy question. Dave, as you think about kind of the interplay between level of distribution growth, balance sheet, and perhaps incremental flexibility to take advantage of some maybe assets out there that are dislocated or will be at some point in the near future, and just being able to capture those opportunities and in terms of acquisitions for growth, over the next year or two, how do you square those pieces?

David Dehaemers

You mean under the current market situation?

Brandon Blossman

Yes. I mean, assuming that there are some attractive assets at relatively low near distressed price available in the next 12 months. You’re kind of pushing forward with a very aggressive distribution growth strategy. Is there an interplay between how much cash you give out versus flexibility on the balance sheet and just cash balances that maybe deployed or could have –could be deployed for some opportunistic acquisitions?

David Dehaemers

Yes, look, we’ve talked everybody since we went public either in May of 2013 or May of 2015 with either of the two entities about what our growth in our distribution we thought we could achieve this. And I don’t think anything fundamentally with our business has changed those thoughts. And so our current assets in our 2016 budget and our 2016 guidance should be able to allow us to continue to achieve those things. Do we – I mean, just because everybody else is doing, it does that mean we should payout $0.05 less next quarter or $0.20 less next year just so we can – I mean, we already only levered at 2.9 or 3.5 times.

So I think rather than that, I would focus on the fact that depending on the size of the assets, we would look to be acquisitive and things presented themselves. We are going to be pretty picky about it. But as our discussion talked about, we have $300 million of liquidity on our existing line of credit. If the capital markets, particularly the debt side free up and we could do something that made sense from a longer-term debt standpoint that would potentially free up even more on that side.

So, I think, we’re – again, broad brush strokes. I think we’re going to continue to do play the same game that we have played all along, which is work really hard on the stuff that we can control, kind of deliver on the things that we told people that we’re going to directional hit toward in terms of growth and see if we can add to our assets if those things present themselves again in a very prudent manner.

Brandon Blossman

That’s actually a useful color and not a bad place to be in terms of, at least, in terms of the peer group.

David Dehaemers

Yes.

Brandon Blossman

Okay. And this is for Gary. A nice tight range on 2016 guidance in terms of EBITDA, is there anything that could push you above or below that range that you foresee as a possibility, not a probability?

David Dehaemers

Yes. Brandon, and I think one clarification, you’ve referenced that range at adjusted EBITDA, and in fact, it was distributable cash flow.

Brandon Blossman

Sorry.

David Dehaemers

Just to make sure we are all in the same pace there. I think we’re comfortable with that range. The financing or the capital structure could change a little bit, but we are very comfortable with that range. We’ve gone through our budgeting process, look at all of our assets and the capabilities they have, the risk and opportunities and again remain comfortable with that range at DCF. One of the reasons we didn’t give adjusted EBITDA in our guidance is because of the capital structure flexibility that we do want to have. So that the metric at DCF is a good one we think and we stand behind that range.

Gary Brauchle

I would just add, there’s always possibilities right, I mean, but I guess I kind of analyze – analogize it to – I own a small farm. And I know for a fact that there’s some rattlesnakes on my farm. Now, I can either kind of choose never go and go out and walk around my farm ever, because I know there’s some rattlesnakes over there, and I can kind of pull on my big boy boots and walk around and recognize that my chances of getting bit by a rattlesnake are pretty remote and having the boots on protect me a little bit.

So I think that’s kind of the way we were approaching all this. I think that one of the thing I would just throw out there in terms of color. You guys will see, you probably haven’t had a chance to look at yet, but we filed our 10-K yesterday. And when you look at that with the addition of Pony Express last year, we have to identify certain customers of a certain size, and in there, you’ll see that our two big – we might have 90 or 100 customers in all of TEP, I would say.

Again, Gary told you they are all, all of our accounts receivable are 99% paid and current. There are two big customers on there because of Pony, in particular, our Highland and Shell, and not in that order, Shell and Highland, and I think they were somewhere around 28% and 18% or is that give or take. Sorry, when I said Highland, their guys are correcting me, it’s continental resources. But we just feel really good about our business and, again, there are always possibilities that could snap up and get you, but we’re not going looking for ghost around every corner.

Brandon Blossman

Okay, fair enough, and appreciate the color. That’s all for me right now. Thanks, guys.

Gary Brauchle

Great. Thank you.

David Dehaemers

Who is up next?

Operator

And the next question comes from the line of Kristina Kazarian from Deutsche Bank.

David Dehaemers

Hey, Kristina.

Kristina Kazarian

So quick question, I noticed at the bottom of the press release that it mentioned that the GP of Tallgrass, say, got an authorization for $100 million of equity purchase program for either TEGP or TEP units. Can you guys just talk a little bit about the announcement here and the motivation behind it?

David Dehaemers

The motivation is Tallgrass Development. And I’m sorry, it’s really just the ownership of Tallgrass Development. And that ownership is owned by our private equity partners as well as our Kansas City management team. It’s a pretty simple motivation. None of us is very happy with the price action in our units. And we feel like we have gotten tarred and feathered with everybody else. The fact of the matter is in the short run, the market is what it is. And that’s the way the market wants to value us, that’s fine. But net-net, we have fair amount of money that we can put to work and we feel at the current prices that we’re at that we’re buyers and not sellers. I’d be glad to kind of answer any follow-up to it, but it’s…

Kristina Kazarian

No, no, no, that’s perfect. So you guys want to be doing is generally just a signal of confidence and their desire to put some more capital to work behind the story?

David Dehaemers

Yes, this is the entity that owns 20 million or 13 million TEP units and owns the 50% in REX. We’ve been self-funding our REX build out of the expansion project, but we’ve had – we have good cash flow on top of that. We obviously have cash flow from those 13 million TEP units. So we got some money available to us that we’re interested in redeploying.

Gary Brauchle

And Kristina, I would add just for clarity. I mean, this would be a Tallgrass Development purchase. In the open market, it wouldn’t be retiring any TEP or TEGP units or shares into treasury and thereby not affecting the IDR cash flow at TEGP or Tallgrass Equity, I should say.

Kristina Kazarian

Perfect. Question, I know you guys talked also about not needing to access the equity or debt markets. Can you help me think about what that would imply in terms of the next dropdown and I was thinking that the next one might be get funded and I know you also make comments about the how the debt market has been really tough right now. So, is it still the – am I still thinking about it this way? And what am I really watching for in the debt markets rate wise in terms of -- or what you guys watching for there?

David Dehaemers

Well, I mean, what I can probably tell you is what you – what not – whether it’s what – what to watch for, and what not to watch for. What not to watch for is what it is, Dave, which is you got a – the risk-free rate today of the 10 years, let’s say give or take, it bounces around a little bit, but let’s say it’s 175 today us issuing into the debt market for 10-year piece of paper at 175 plus 700, this isn’t going to work. I mean, it’s ridiculous and they’re not open right now anyway.

So whether it’s ridiculous or whether or not anybody would lend money at any given rate is not something that they’re apparently they’re interested in or we are interested in. So, I think, if you got something back to where the all in coupon is more reasonable, kind of in that all in 5%, 6% costs, that would be something that would be something where we would be interested, I think, we have another 2.5 years, Gary, give or take on our revolver life.

Gary Brauchle

Yes, correct, May of 2018.

David Dehaemers

And, again, I think in terms of kind of the drop down, we’ve said from the very start, we kind of saw REX with the power up going in the end of 2016, I would say that or again, if capital markets are accessible to us. And keep in mind that I think, at least, in my mind and in our partner’s minds on a private basis that we demonstrated pretty easily I think here at the beginning of the month that we have other arrows in the quiver so to speak than just the public capital markets. I think our goal is still kind of marching toward the beginning of 2017 REX drop, it would be nice to have the public capital markets available to us. But that is kind of still our thinking.

Gary Brauchle

Yes, that Kristina just to add quickly the credit spreads as you know have just blown out. And that would be what we continue to watch and hope that they tightened particularly in the high-yield space. And just as a reminder the guidance that we did issue does not include any additional dropdowns for calendar 2016, as Dave kind of just suggested as well.

Kristina Kazarian

Okay, perfect. And then last one for me. You guys mentioned this a little bit on the call. So I’m just trying to make sure I got all of this. Can you talk a little bit about attracting new volumes on Pony and where they’re coming from? Is it Bakken, Rockies, or just more color there would be great?

David Dehaemers

The answer to your question is where it’s coming from is yes. And so once the Buckingham terminal is let’s say and up in service in June we will be able to get, that will let us get at least in our mind more volumes out of Colorado. And so we’ve got guys spend on the entire week here the 1 of March down in Houston, we got a lot of interesting calls. I mean as you can imagine people are not, it’s kind of a good news, bad news thing right. People aren’t interested in signing long-term take-or-pay commitments, but there is a lot of interest in people utilizing our entire kind of crude network now that it is built and running demonstratable that it can move the volumes that it needs to move. So we’re pretty enthusiastic about the possibility of getting volumes from both Bakken as well as the DJ Niobrara, et cetera.

Kristina Kazarian

Okay, and then anything about what types of rate or, how I would – what’s the ideal terms or structure and people are kind of looking for you would be comfortable with?

David Dehaemers

Well, again we have a walk-up rate posted I think it’s somewhere around 4 and 4.25 and we’ve told everybody we can do up to another 100,000 barrels a day and we had to save some for walk-up anyway. So people can just show up with barrels and we will move them. Now obviously the more of the term they can give us, the more of the commitment they can give us, the more volume they can bring to us, the better we can perhaps do on the rate. So I hope that helps?

Kristina Kazarian

Yes, that is very helpful. Thanks guys, that’s it from me today.

David Dehaemers

Thank you.

Operator

And your next question comes from the line of Ethan Bellamy from RW Baird

David Dehaemers

Hey Ethan.

Ethan Bellamy

Hey guys. So I’m kind of glad build, not there to scale across the table for asking this, but if the compression trade of the GP and the LP something that you guys have ever considered I know Dave you march to beat up your own drummer, but obviously there’s some pretty enchased skpetistusm about IDRs out there right now?

David Dehaemers

Bill may not be here, but I will scale for him Ethan. No, I mean I the compression trade, I mean look there’s a 130 MLPs in the market right now. We could have a long interesting discussion about whether there are to be that many et cetera whether that many should have been mark brought to market and whether it’s really appropriate vehicle for all of them et cetera. I happen to think, we are one of those where the GP, LP motivation is extremely strong and it does all constituencies you pick your area, it does the LPs let’s just start with them a lot of good.

I mean we’ve gone from distributing MQD of a $1.15 about 2.5 years ago to when we follow through here this next quarter, it’s damn near $3 a quarter in 2.5 years. And so if you go back and look at history, again a 20 year history, in my case with what I have in my mind, I think most of sure we had a our tough, everybody has their times, and you have your ups and downs okay. But you go back and look at the super successful MLPs, the management teams, the ownership of the general partner et cetera has provided way more outstanding growth net-net over the long haul than any of the other ones where you just had care takers run in any particular given business.

Having said that is there a time and place always for perhaps the cost of money being so prohibitive between an LP and GP that it makes sense to I forget exactly the words we use, but kind of frame them together or push them together, yes probably, but we’re not anywhere near that at least in our minds.

Ethan Bellamy

Yes, and was there ever a point where say TEGP would get so cheap that would make sense for TEP to buy and somehow retire those?

David Dehaemers

I think like somebody pointed out earlier, we just kind of as a first step initiated a $100 million open program to buy back shares on the open market. So I mean there is only the prices we’re at today there’s only about by my rough math, and I’m not very good about at math on some days, but probably somewhere around $600 million of market value there. So that should tell you something.

Ethan Bellamy

Sure. Kind of a separate question but also something that’s been brought up lately is a knock on the space. I’m curious as a thought leader what you think about the delta between depreciation expense and maintenance CapEx, that’s booked? And I’m curious about, if you could refresh us on how you think about maintenance CapEx and assures that there are no balloon payments out there in the future, et cetera?

David Dehaemers

Yes, I mean, couple of things in addressing what you said a minute earlier. Just let me remind everybody that when we took TEGP public, a small group of us – our partners in Houston, New York and here in Kansas City still own 70% of that company, number one. And by my latest count, we haven’t sold any of our Class B shares, and in fact, if speaking only for my self I bought a lot more TEGP.

So with regard to the depreciation and maintenance CapEx, the depreciation one is always interesting. It’s funny how it rears its head. I have a very vivid memory of kind of around 2000, 2001, when I particular and it was said something about Kinder Morgan not booking enough depreciation. And that was all very interesting, because it allowed me to buy some Kinder Morgan shares about somewhere as I recall $12 cheaper. The next day after that report came out and it was probably one of my better purchases.

I mean, depreciation has nothing to do with anything. I mean, depreciation might have something to do with a regulated local distribution company in terms of them trying to maintain their rate base, but that doesn’t have anything to do with anything. Perhaps economic depreciation has something to do with it, but the whole idea of tax depreciation or some arbitrary GAAP depreciation has nothing to do with anything.

The fact of the matter is on the maintenance CapEx side of things, we spent last year, we’ll spend again this year somewhere, I think, it’s kind of a broad range here between $10 million and $15 million of CapEx. And we’ve disclosed in our 10 K that we had an indemnity on Trailblazer that when we bought it that we – there was a section of pipe that we were concerned about that we’ve ran some tools on that we were going to be replacing TDEV indemnified against that, so TEP has no exposure there et cetera.

We’re going to spend probably $20 million this year replacing miles of pipe. Stuff comes up, I think in our instance, if you could spend days with our engineers and see the things that we do in terms of running our smart digs and the analysis we go through, we’re safe as anybody. We don’t want to get anybody hurt. We don’t want our pipelines to be out of businesses – business, those are our cash register.

So we don’t feel like we’re skipping on that. Now, might something come up that is unforeseen, where you discover problem sure. And what are we going to have to do with that, we’re going to have to deal with it. But again that doesn’t mean that we don’t, like I said earlier, kind of keep putting on our boots and walking around the farm. It doesn’t mean we don’t keep running the pipeline company. This is a business that we’re in that’s what we got to do.

Ethan Bellamy

Got it. Thanks, Dave. I appreciate that. And then last question, has William showed you whatever it is you’re planning on selling?

David Dehaemers

Not yet, but we’ve got our ears to the ground.

Ethan Bellamy

All right. Thank you, sir. I appreciate it.

David Dehaemers

You’re welcome.

Operator

And the next question comes from the line of John Edwards from Credit Suisse.

David Dehaemers

Good afternoon, John.

John Edwards

Good afternoon, everybody. Just – you probably commented on this on the call, maybe I missed it just on the deficiency payments going forward. At this point, the number, this $4.5 million, is that adjustment you think kind of a good number each quarter to assume?

And then arguably to your point, you made in the press release, it looks like, I mean, you do ultimately get that money, you don’t book it for EBITDA, but from operating standpoint, it sounds like you view it as that is the way your franchises operating correct? Is that correct?

Gary Brauchle

That is correct, John, on the latter point. And on the former, I would note for you that the $4.5 million experience in Q4 is TEP’s two-thirds interest of that. And so what we’ve said is that, when you look at 2016 and project out only cash flows of which TEP will own 98%, you could probably estimate between 5% and 10% of those cash flows at the DCF level to show up as deficiency payments, and that’s probably a reasonable way to model it for 2016.

John Edwards

Okay.

Gary Brauchle

Now, we may not expect it all the way through 2016, but for now it’s a good proxy and a good number to estimate and we’ll keep you posted on that as we move forward.

Gary Brauchle

So let me add one point of clarification. I hope it’s clarifying. Our Pony Express contracts are take-or-pay period. We get paid the same amount every month whether the pipeline moves one barrel of oil or moves 300,000 a day. So we get the same amount of money.

John Edwards

Okay.

Gary Brauchle

And so we already have the cash in our pockets at the end of every month. And so what happens is, it just like signing a year lease on an apartment with a little bit of difference right. So if we signed a lease for an apartment for two years and someone paid us every month, but they didn’t move in there, we wouldn’t really care, we have an apartment it’s not been lived in, but we are getting paid anyway. So little bit the same way on the pipeline, now clearly if people didn’t move any barrels, not sure we could pay all that out, because we would have operating costs once they eventually move them. What happens is the accountants won’t let us book the revenue, so let it show up in net income and EBITDA until they actually move the barrels, so we kind of have the obligation to move them at some future date, but we already have the cash.

John Edwards

Okay.

David Dehaemers

The deficiency, the cumulative deficiencies through year-end show up on the balance sheet and they’re about $26 million give-or-take that’s a very manageable amount for our pipeline to deal with and the incremental operating cash flow or the incremental operating costs of moving those deficiency barrels for periods in the future that we don’t get necessarily cash paid for is not all that significant at these levels.

John Edwards

Okay. And then did I hear you correctly, you said that your CapEx for 2016 is only $25 million and the liquidity against that is $300 million? Was that correct?

Gary Brauchle

Yeah, the growth, the known growth CapEx or growth projects that we kind of have on our radar for a calendar 2016 or about give-or-take $25 million, maintenance would be on top of that; but maintenance is dealt within operating cash flow. And yes, we have between $200 million and $300 million at the end of January, $300 million of available capacity on our revolver, because our leverage covenant in that revolvers is 4.75 times. That doesn’t mean we anticipate going above four or anywhere near 4.75 I’m just illustrating that, we’ve got adequate liquidity available for us for the balance of the year and don’t need to hit the equity or debt markets for our organic growth projects that we know at this time.

John Edwards

Okay. And then just remind us on the rate case, how much you are benefiting from the new rates? What’s the incremental revenue going to be? I guess that’s starting on TIGT on May 1?

David Dehaemers

Yes, I don’t think we’ve told anybody that; and I think you can imagine for competitive, as well as kind of a if the rate case is actually the kind of a lawsuit the way to think about it. That stuff, we’ve taken some of that or the rate is going to affect in May 15, and we have put some of that amount into our 2016 budget, but it’s not really something that we would share with you at this time. Let us just say that if you think we know what we are doing, we think we put a very prudent amount in a very achievable amount in there.

John Edwards

Okay. When, is on the accounting for you said the subject to refund. Is that going to show up then in EBITDA or will it be similar to deficiency payments, where you can’t really book it for EBITDA, but you’ll get it for DCF. How will that work?

David Dehaemers

Yes, look if we don’t reach a mutual settlement with our shippers, those rates go into effect May 1, subject to refund. What we would do is incur those as revenue probably put some kind of an allowance against those revenues and so when you get to the adjusted EBITDA number all the net expected collectable or earned amount would be in adjusted EBITDA. You could almost think of it as, not indifferent to an allowance for bad debt or bad debt expense or something like that. So it will all flush itself out at net income through adjusted EBITDA John.

John Edwards

Okay. And then, any, I know you spoke about this in the past as far as renewal on Rex out in the future. I think you said it was like an 2018 or 2019 roll off timeframe. Any color you can give us on that or the markets just to Rocky for any progress to be in that regard?

David Dehaemers

You are talking about the West End initial 10- year contracts that were signed in 2009?

John Edwards

Exactly.

David Dehaemers

Yes, they roll off in 2019, and there we haven’t forgot about them, we’re working on them, but probably as we’ve said 2.5 years ago, the market’s probably going to be unwilling to talk about those in any meaningful way until probably a year inside those; that doesn’t mean that we’re not working on ways to perhaps ameliorate that, but that’s not stuff we would share at this time for competitive reasons.

John Edwards

Okay. That’s it from me. Thank you, so much.

Gary Brauchle

You’re welcome.

David Dehaemers

Thanks John.

Operator

Your next question comes from the line of Selman Akyol from Stifel.

David Dehaemers

Hey Selman.

Selman Akyol

Thank you. Good afternoon, just a couple of quick one. So just going back to the growth CapEx on the $25 million, I guess what are those projects?

David Dehaemers

Yes, it’s a variety of AFEs I think by my last count it’s probably 20 to 25 AFEs,butsome of them maybe $100,000 and like there maybe one in there for $10 million. so it’s made up of different ones, those are really kind of what those are some remaining build out dollars that were in the original Pony and nickel build that are straggling in here at the end and then some of them are kind of a small water projects, as an example or a small pipeline connectors to Trailblazer as an example or small enhancements to believe it or not our process and facilities, so…

Selman Akyol

Got you. So you mentioned the water assets, and I guess that’s where I was going in particular. Should we expect any meaningful increase or size is that something kind of a focus for 2016 or you’ve got what you got, and you just did that for customer relations at the time and you’re not planning on growing that?

David Dehaemers

No, we’re planning on growing it I think – we always think about customer relations, we never do anything just exclusively for customer relations. We did it for economic reasons. I think the scalability of what we bought from Whiting is tremendous, it’s tremendous not only with respect to Whiting,but our contracts with them go up in 2017. So we feel good about add-on years to 2016. The add-on years to 2016 starting in 2017. What we have in 2016 is built into our budget, we could frankly very easily hooked up some other customers onto that same system and see additive stuff to that in 2016, but we’ve not baked any of that in if we get some of that that will just be low cost very good for us.

Selman Akyol

Very good. All right, that does it for me.

Operator

Your next question comes from the line of Charles Marshall from Capital One.

David Dehaemers

Hey, Chuck.

Charles Marshall

Hey, good afternoon, everyone. Just, two quick ones from me with regard to REX and I apologize if I missed it, but what was your target year for dropdown that you mentioned 2017 was that?

David Dehaemers

Yes, nothing has changed for us. I mean we’ve always talked about the kind of end of 2016 beginning the 2017, we do not have it in 2016 and so that would kind of lead you to early 2017; some things have to happen there to be realistic about that; if it’s not going to be the end of the world if it isn’t January 1, of 2017 or first quarter of 2017. It would be nice to have the capital markets open to us, but we have some other things that we would leverage that we can pull that are not available to just anybody.

Charles Marshall

Got it. And then just a follow-up regarding the potential Prairie State Lateral project, has there been any development with that potential pipe?

Gary Brauchle

There has not and this is kind of where I miss Bill, we miss Bill a little bit, we miss him anyway. But it’s like I think I would just pair it with Bill has said in the past. We think that’s something like a Prairie State will get built in the future, but as you can imagine it’s mushing along a little bit with natural gas prices et cetera may not be quite the size that we thought it was et cetera and then obviously some of the merger activity that’s gone on in the LDC area that’s probably pushed it back some. So I wouldn’t make any firm plans on it, I guess at this point, but it’s still out there it’s just kind of on the back burner.

Charles Marshall

Got it, and then just one last one from me. I respect you’re not going to provide adjusted EBITDA guidance for 2016, but just from your internal model, I mean can you discuss some of the assumptions that are better being used for your low and high case at least internally in your forecast? What are the some of the big swing factors on a low to high end on the book ends here? I mean do you have volumes on Pony, which you kind of talk about, it doesn’t really matter, because you’re receiving the same cash month-to-month. But is it volumes across the processing facility? Is it coming from the nat gas segment? I mean, what are sort of the big swing factors internally that you’re seeing from your adjusted EBITDA forecast?

David Dehaemers

Yes, I mean, I think it has to do to some degree with incrementals on Pony if we continue to see those, we’re not counting on those, but that could be an upside. I think capital structure is one with one point to give or take gone on a revolver at a funded debt cost of kind of 2% or 2.25%. That’s very cost effective financing, if we were to do debt issuance we would have incremental expense there.

Should we remain with the revolver through 2016, that would provide us some benefit at interest expense or cash interest costs. So it’s things like that, Chuck, that we think about and are kind of movers within that range.

Charles Marshall

Okay. That’s it from me, guys. Thank you.

David Dehaemers

Yes, thanks, Chuck.

Operator

The next question comes from the line of Ted Durbin from Goldman Sachs.

Ted Durbin

Hey, thanks for taking my call. On REX itself, what’s the debt balance at the end of 2015 sort of CapEx and the free cash flow? And are you going to use the – assuming there’s free cash flow you thought to delever further through 2016? I’m just kind of thinking through what the leverage will look like at the end of 2016 when we’re thinking about dropdowns?

Gary Brauchle

Yes. So the debt balance at REX is $2.6 billion, just shy of that, so $2.575 billion impact. Cash flows from REX within or by the partners of REX are going to be used for – in some form of fashion some distributions to the partners of REX. But in a big way in 2016 for the capital costs associated with the capacity enhancement project on Zone 3, it’s a significant cost, but one that is very economic for us. So, those are the major uses of free cash flow at REX.

Ted Durbin

Got it. So probably won’t be paying down debt much more just on the expansion side of things and distribution?

Gary Brauchle

No, no, that’s – I mean…

David Dehaemers

This is 2016, I’m talking about.

Gary Brauchle

Yes, I mean, not – we don’t have anything to do in 2016. So I mean our first tranche comes due next in 2018. So I think maybe a little more granular even though it’s private company and we’ve done our best throughout time to share stuff with people and we’re going to do more here now as you know. The project is over $0.5 billion project. We probably spent in excess of $150 million already in 2015 on the project. So we’ve got somewhere north of $350 million or more to spend on the project.

This year we told you it will be in place by the end of 2016. And then after that we will take out cash distributions and our goal is to, like we said, kind of eventually when the tranches come due in 2018, 2019 and 2020, at lest, Tallgrass’s goal not speaking for other partners is to have REX, kind of at a four times debt to EBITDA.

Ted Durbin

Perfect. And, Dave, just to be clear those are – you need spaces that $500 million on the – is that a 100% level?

Gary Brauchle

Yes, that’s correct.

Ted Durbin

Got it. Okay. That’s it for me. Thanks. I appreciate it.

David Dehaemers

Yes. You’re welcome. Thank you. So, operator, still got two or three more calls here or question?

Operator

Yes. There’s two more.

David Dehaemers

Okay, great.

Operator

The next one comes from James Carreker from U.S. Capital Markets.

David Dehaemers

Hey, James.

James Carreker

Hey, guys. Thanks for taking the call after a 5:00 Central here. Just to keep picking on REX, I guess, a little bit. You talked a lot about Pony Express counterparties, and that’s very appreciated. How do you guys think about the exposure on the REX side obviously not in the partnership yet, but that is the goal. And so how do you think about the legacy west-to-east contracts given the largely producer customers there?

David Dehaemers

Yes. I mean, we’ve got a number of those contracts are good counterparties. I mean, we’ve got some that I think are probably in the soup a little bit. I think that’s kind of a little bit out of our control. I think probably the thing that I would leave you with takeaway is that, we signed up all these new contracts with really good counterparties in the Marcellus and Utica in the last two years. Both ones that are already out there, because we made Zone 3 bidirectional, as well as ones that we’ve signed up with the new power up.

So REX has a whole new deck of many, many more counterparties, which I think helps us. With regard to the legacy, if something goes bump in the night, again, we will have to – we’ll deal with it. And it clearly, we will deal with reality also when we go to put it in the partnership. Now, we’re not going to be foisting our problems on TEP, et cetera. And so, again, we’ve got, I think, most of the frack, I just got a note here that probably 75% to 80% of our Western shippers are all investment grade. I mean, if you take down through them and what their capacity – what their impacted capacities are, so.

James Carreker

No, I understand. I guess, I’m playing a worst-case scenario and how much of those volumes are going unused versus what they signed up for, can you bracket exposure or is that something you’ve not done at this point?

David Dehaemers

Well, I don’t know that bracketing exposure or worst-case scenario is something we do around every day. I guess, I would tell you, I think, we said at the other day that we moved 3.1 Bcf on a – any particular day which if you would imply from that that were full on the east end at 1.8. That would mean that that day we moved 1.3 Bcf of our 1.8 contracted. That’s no different than it’s been for the last 6.5 years on the REX west end.

So, again, I guess, the point I would leave you and everybody that’s on the call that is interested is that the REX is an private entity now. When it gets put in a public entity, it will be done on a very fair, prudent, reasonable manner, and will be done on financial footing that is assures TEP of kind of the returns that is due. So…

James Carreker

Yes. And if I can – that follows up to my last question, I guess. As the market has kind of declined over the last 12 months or so, the market is placing different multiples on midstream assets. And so does that kind of factor into how you think about dropdown multiples in the future, is that one of many things, also considering now with a lower unit price you may have to lower the price in order to get the same accretion, is all that go in to how you think about dropdowns going forward?

David Dehaemers

I think it always factors into dropdowns. I think the good news as we told you that we are not going to drop it in any time soon. And in fact, we will reconsider dropping it and depending on the markets there. If you think the market is permanently down here, then I don’t know maybe never gets dropped down. But I – it’s kind of hard to speculate what the market may or may not be given us at anytime. Are we undervalued today? Unequivocally, has the market overcooked itself on the downside in my humble opinion? Absolutely. So asking me to speculate whether or not we’re going to drop it own at a nine or 10 times or five or six a year from now is a little hard for me to kind of answer.

James Carreker

Understood. But thanks for the color. That’s all.

David Dehaemers

You bet.

Operator

And the next question comes from the line Gabe Moreen from Bank of America.

Gabriel Moreen

Hey, everyone. I’ll let you go after this. A minor question since most have been asked. Just in terms of laterals of the REX, I think, [indiscernible] the gas few company announced the lateral off for REX, just wondering if you’re going to be participating in that and also whether any of those at a laterals kind of market area laterals are making progress?

David Dehaemers

A couple of things. So, Gabe, thank you. But I just want you and everybody know that the reason that you probably bring up the 5 o’clock was just as you are anxious to get off the fine [ph] and listen to the phone and listen in, not us. But you get my drift there Gabe, right?

Gabriel Moreen

Yes, absolutely.

David Dehaemers

No, [indiscernible] hooking into REX will be a great thing for REX. We did notice that. We have been talking to them. I think, clearly, if they are drilling a hole in the side of our pipe will be involved in it. So what we would love to be a partner with [indiscernible] on that lateral absolutely, we may or may not. But we will any load that comes in off REX is great for our pipeline and we’re excited about that.

I think secondly, we – I think we – press release I think a little bit, we’ve recently done some market area work with demand pull LDC customers in Indiana, as an example. And there’s a lot more that stuff going on not just with utility load, but with what I should say utility, but not with just gas utility, but electric utilities now that you’re seeing more plan activity going up on the electric side et cetera, that’s getting a lot hotter right now, and we’re looking for a lot more that to come our way and anxious to announce as they occur.

Gabriel Moreen

Great. Thanks, Dave. I appreciate it. Have a good night.

David Dehaemers

You’re welcome. Have a great evening. Anymore please?

Operator

There are no more questions at this time.

David Dehaemers

Well, operator, thank you for hosting our call. Everybody thank you for calling in and being interested in Tallgrass. We appreciate your interest and I appreciate having you as partners alongside us. Have a great evening and we’ll talk to you next quarter.

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